UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
----- ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number: 1-13088
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DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 65-0014636
------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
16910 Dallas Parkway, Suite 100, Dallas, TX 75248
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(Address of principal executive offices)
(972) 248-1922
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
November 12, 1997: 7,451,386
Transitional Small Business Disclosure Format (check one): YES NO X
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DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
Form 10-QSB for the Quarter ended September 30, 1997
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 11
Part II - Other Information
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
2
Part 1 - Item 1 - Financial Statements
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and June 30, 1997
(Unaudited) (Audited)
September 30, June 30,
ASSETS 1997 1997
------------- --------
Current Assets
Cash on hand and in bank $ 274,000 $ 229,740
Marketable securities 3,177,245 657,562
Accounts receivable, net of allowance for doubtful
accounts of approximately $1,000,000, respectively 2,419,914 3,219,433
Recoverable income taxes 420,003 374,000
Intercompany accounts receivable - 39,678
Inventories 1,295,961 1,679,011
Prepaid expenses and other current assets 98,080 128,385
------------- ----------
Total current assets 7,685,203 6,327,809
------------- ----------
Property and Equipment, net 5,612,593 5,823,634
------------- ----------
Other Assets 166,002 193,859
------------- ----------
TOTAL ASSETS $13,463,798 $12,345,302
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving line of credit $ 2,168,148 $ 2,485,346
Current portion of long-term debt 1,564,728 1,564,728
Cash overdraft - 174,616
Accounts payable 2,268,191 2,577,706
Advances from affiliates 98,962 -
Accrued liabilities 617,656 387,646
------------- -----------
Total current liabilities 6,717,685 7,190,042
------------- -----------
Long-term Debt, net of current maturities 465,711 509,366
------------- -----------
Commitments and Contingencies
Stockholders' Equity
Common stock - $0.0002 par value. 25,000,000 shares authorized.
7,451,386 and 7,315,022 shares issued and outstanding, respectively. 1,490 1,463
Additional paid-in capital 8,605,573 8,511,509
Accumulated deficit (3,507,460) (2,417,237)
Investment in Millennia, Inc. - (1,529,157)
Unrealized holding gain on marketable securities 1,180,799 79,316
------------- -----------
Total shareholders' equity 6,280,402 4,645,894
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,463,798 $12,345,302
============= ===========
The accompanying notes are an integral part of these consolidated financial
statements. The financial information presented herein has been prepared by
management without audit by independent certified public accountants.
3
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, 1997 and 1996
(Unaudited)
Three months Three months
ended ended
September 30, September 30,
1997 1996
-------------- -------------
Net sales $2,205,858 $7,019,937
-------------- -------------
Costs and Expenses
Cost of goods sold, exclusive of depreciation and amortization 1,993,808 5,567,126
Selling expenses, exclusive of depreciation and amortization 117,075 305,878
General and administrative expenses, exclusive of depreciation
and amortization 937,905 623,545
Depreciation and amortization 366,501 355,251
-------------- -------------
Total costs and expenses 3,415,289 6,851,800
-------------- -------------
Income (loss) from operations (1,209,431) 168,137
-------------- -------------
Other income (expense)
Realized gains (losses) from sales of marketable securities (173,130) 71,119
Gain on sale of fixed assets 130,045 -
Interest and other income 277,622 -
Interest expense (115,329) (108,508)
-------------- ------------
Income (loss) from continuing operations
before provision for income taxes (1,090,223) 130,748
Provision (benefit) for income taxes - 65,331
-------------- ------------
Income (loss) from continuing operations (1,090,223) 65,417
Discontinued operations
Gain from operations of discontinued business, net - 250
-------------- ------------
Net income (loss) $(1,090,223) $ 65,667
============== ============
Income (loss) per weighted-average share
of common stock outstanding
From continuing operations $(0.15) $0.01
From discontinued operations - -
------------- ------------
Total $(0.15) $0.01
============= ============
Weighted-average number of shares of
common stock outstanding 7,386,168 6,152,723
============= ============
The accompanying notes are an integral part of these consolidated financial
statements. The financial information presented herein has been prepared by
management without audit by independent certified public accountants. 4
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30, 1997 and 1996
(Unaudited)
Three months Three months
ended ended
September 30, September 30,
1997 1996
Cash Flows from Operating Activities ------------- -------------
Net income (loss) $(1,090,223) $ 65,667
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Depreciation and amortization 366,501 355,251
Gain on disposition of fixed assets (130,045) -
(Gain) Loss on sale of marketable securities 173,130 (71,119)
Compensation settlement paid with common stock 94,091 -
Provision for bad debts - 18,777
(Increase) decrease in:
Accounts receivable 799,519 (1,675,716)
Inventories 383,050 (58,262)
Prepaid expenses and other (15,698) (404,788)
Increase (decrease) in:
Accounts payable (309,515) 1,178,809
Accrued liabilities 230,010 (23,481)
Deferred tax liability - 390,415
------------ ----------
Net cash provided by (used in) operating activities 528,677 (224,447)
------------ ----------
Cash Flows from Investing Activities
Cash received from or (advanced to) affiliates 138,640 (741)
Cash used to purchase marketable securities (644,752) -
Cash received from sale of marketable securities 582,579 186,859
Proceeds from sale of property and equipment 167,867 -
Purchases of property and equipment (193,282) (556,512)
------------- -----------
Net cash used in investing activities 51,052 (370,394)
------------- -----------
Cash Flows from Financing Activities
Reduction of cash overdraft (174,616) -
Net long-term debt repayments (43,655) (182,142)
Net short-term borrowings (repayments) (317,198) 414,619
------------- -----------
Net cash provided by (used in) financing activities (535,469) 232,477
------------- -----------
Increase (Decrease) in Cash and Cash Equivalents 44,260 (362,364)
Cash and cash equivalents at beginning of period 229,740 615,037
------------- -----------
Cash and cash equivalents at end of period $ 274,000 $252,673
============= ===========
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ 115,329 $110,638
============= ===========
Income taxes paid (refunded) $ 46,003 $ -
============= ===========
The accompanying notes are an integral part of these consolidated financial
statements. The financial information presented herein has been prepared by
management without audit by independent certified public accountants.
5
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation
Digital Communications Technology Corporation (DCT or Company) is an integrated
communications company, primarily engaged in large quantity duplication of
prerecorded videocassettes for customers in the entertainment and a wide range
of other industries. The Company also provided mobile satellite uplink services
of breaking news stories and of entertainment, sporting and other events for
major television networks and news gathering organizations in the United States
and internationally. Additionally, DCT-Internet Corporation (a wholly-owned
subsidiary) provides professional internet website design, maintenance and
hosting for corporate clients worldwide.
DCT, a Delaware corporation, was incorporated on November 12, 1987 under the
name MagneTech Corporation as a wholly-owned subsidiary of S.O.I. Industries,
Inc. (now Millennia, Inc.). The Company's shareholders changed the name to
Digital Communications Technology Corporation on April 29, 1994. DCT's Common
Stock has traded on the American Stock Exchange since May 23, 1994. As of
September 30, 1997, Millennia, Inc. owned approximately 10.5%of the Company's
issued and outstanding Common Stock.
The Company offers its reproduction services to entertainment companies and a
wide range of industrial customers, including advertising agencies, direct
selling organizations and educational groups throughout the United States,
Canada and Latin America.
The Company's satellite operation consisted of one mobile KU band unit which is
capable of transmitting live or pre-recorded programming from any location to
commercial satellites. The Company's satellite customers include local, national
and international broadcast network and/or cable television outlets, with signal
origination points located principally in the Southeastern United States. This
operation was terminated in September 1997 and the related equipment was sold to
an unrelated third party.
The Company purchases bulk quantities of videotape ( pancake") and empty video
cassettes ( shells") for its reproduction business from several manufacturers at
market prices in the United States and the Pacific Rim. The videotape and video
cassettes are readily available on the open market. The majority of the
Company's video duplication equipment is manufactured by several major
manufacturers in Japan and purchased from domestic distributors. The Company
purchases its materials and equipment from several major manufacturers and
believes that the loss of any of its suppliers or manufacturers would not have
an adverse material effect on the Company's business, financial condition and
results of operations.
The accompanying consolidated financial statements include the accounts of
Digital Communications Technology Corporation (d/b/a Magnatech Corporation) and
its wholly-owned subsidiary, DCT-Internet Corporation. All significant
intercompany transactions have been eliminated in consolidation. The
consolidated entities are referred to as Company.
During interim periods, the Company follows the accounting policies set forth in
its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934 on Form 10-KSB filed with the Securities and Exchange Commission. The
June 30, 1997 consolidated balance sheet data was derived from audited financial
statements of the Company, but does not include all disclosures required by
generally accepted accounting principles. Users of financial information
provided for interim periods should refer to the annual financial information
and footnotes contained in its Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 on Form 10-KSB when reviewing the interim
financial results presented herein.
6
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 1 - Basis of Presentation - continued
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal year
ending June 30, 1998.
The costs of the Company's products are subject, from time-to-time, to
inflationary pressures and commodity price fluctuations. In addition, the
Company from time-to-time experiences increases in costs of materials and labor,
as well as other manufacturing and operating expenses. The Company's ability to
pass along such increased costs through increased prices has been difficult due
to competitive pressures. The Company attempts to minimize any effects of
inflation on its operations by monitoring and controlling these costs.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Summary of Significant Accounting Policies
a) Marketable securities
Marketable securities consist of equity securities which had an aggregate
cost of approximately $1,996,446 at September 30, 1997. The marketable
securities portfolio contains net unrealized gains of approximately
$1,180,799, resulting in a net carrying amount of approximately $3,177,245
at September 30, 1997. The unrealized gains are reported as a separate
component of stockholders' equity. The Company's marketable securities
portfolio is classified as "available for sale" securities.
During the first quarter of Fiscal 1998, the Company reclassified its
holdings in Millennia, Inc., consisting of approximately 730,627 shares at
a historical cost of approximately $1,867,782, to its "available for sale"
portfolio. These costs and related effects of unrealized holding gains are
included in the amounts shown in the preceding paragraph.
b) Pending changes in accounting standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128).
FAS 128 specifies new standards designed to improve the EPS information
provided in financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. Some of the changes
made to simplify the EPS computations include: (a) eliminating the
presentation of primary EPS and replacing it with basic EPS, with the
principal difference being that common stock equivalents are not considered
in computing basic EPS, (b) eliminating the modified treasury stock method
and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements. FAS
128 also makes a number of changes to existing disclosure requirements. FAS
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company has not yet
determined the impact of the implementation of FAS 128.
7
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 2 - Summary of Significant Accounting Policies - continued
b) Pending changes in accounting standards - continued
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130,"Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income. The purpose of reporting comprehensive income is to
present a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than
transactions with owners in their capacity as owners. SFAS 130 requires
that an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated capital in the
equity section of the balance sheet. SFAS 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company has not yet determined the impact, if any, of the implementation of
SFAS 130.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. Once operating segments
have been determined, SFAS 131 provides for a two-tier test for determining
those operating segments that would need to be disclosed for external
reporting purposes. In addition to providing the required disclosures for
reportable segments, SFAS 131 also requires disclosure of certain "second
level" information by geographic area and for products/services. SFAS 131
also makes a number of changes to existing disclosure requirements. SFAS
131 is effective for fiscal years beginning after December 15, 1997, with
earlier application encouraged. The Company has not yet determined the
impact, if any, of the implementation of SFAS 131.
Note 3 - Inventory
Inventories are valued at the lower of cost or market using the first-in,
first-out method of accounting. Inventory consists of the following components
as of September 30, 1997 and June 30, 1997, respectively:
September 30, June 30,
1997 1997
------------- ---------
Raw materials $ 911,876 $1,164,970
Work-in-process 122,873 474,091
Finished goods 261,212 39,950
$1,295,961 $1,679,011
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 4 - Property and equipment
Property and equipment consists of the following at September 30, 1997 and June
30, 1997, respectively:
September 30, June 30,
1997 1997
------------- ----------
Machinery and equipment $ 9,832,845 $ 9,794,616
Buildings and improvements 332,440 332,440
Leasehold improvements 1,094,446 973,608
Computer equipment 451,300 447,087
Furniture and fixtures 304,055 304,055
Transportation equipment 260,154 269,966
12,275,24 12,121,772
Accumulated depreciation (6,735,647) (6,371,138)
5,539,593 5,750,634
Land 73,000 73,000
Net property and equipment $ 5,612,593 $ 5,823,634
Note 5 - Revolving Lines of Credit
The $5,000,000 line of credit facility allows the Company to borrow funds up to
a certain collateral base. The collateral base is comprised of a fixed
percentage of eligible accounts receivable and inventory, as defined in the
credit agreement. On August 21, 1997, the Company's lending institution notified
the Company that the lending institution intends, 120 days subsequent to the
notice, to stop making further advances on the line of credit and accelerate the
maturity of the debt then owed. As a result of this action, the Company has
determined that it is in the best interest of the Company to obtain a substitute
lending institution and is currently in ongoing negotiations to secure
replacement financing.
Note 6 - Litigation
The Company may from time to time be party to various legal actions arising
during the ordinary course of its business. In addition, the Company is
currently involved in the following litigation:
On March 4, 1996, Richard Abrons, allegedly on behalf of the Company, and Adrian
Jacoby, allegedly on behalf of an affiliate company, Millennia, Inc., formerly
known as S.O.I. Industries, Inc. ("Millennia"), brought a purported shareholder
derivative lawsuit against the Company's board of directors - Kevin B. Halter,
Kevin B. Halter, Jr., Gary C. Evans and James Smith - as well as Halter Capital
Corporation and Securities Transfer Corporation. In addition, the Company and
Millennia have been joined as "nominal defendants." In the lawsuit, the
plaintiffs have alleged breaches of fiduciary duty, fraud, and violations of
state securities laws. The plaintiffs seek unspecified actual and exemplary
damages, a constructive trust against the assets of the defendants and an
accounting of the affairs of the defendants with respect to their dealings with
the Company and Millennia. In addition, the plaintiffs have requested a
temporary injunction and the appointment of a receiver for the Company and
Millennia.
9
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 6 - Litigation - continued
In 1995, Halter Capital Corporation ("HCC"), in which Kevin B. Halter and Kevin
B. Halter, Jr. (the "Halters") are principals, negotiated the satisfaction of
$1,217,000 in debt owed to creditors by Millennia's subsidiary, American Quality
Manufacturing Corporation ("AQM," since sold). The Halters are also officers and
directors of Millennia. HCC satisfied these debts by transferring, in the
aggregate, 1,659,000 shares of Millennia common stock it owned to the creditors.
To repay HCC for the AQM indebtedness HCC paid, Millennia transferred to HCC
1,622,000 shares of DCT Common Stock it held as an investment. With the payment
of DCT Common Stock to HCC and the salaries or other compensation received from
Millennia by the Halters, Mr. Evans and Mr. Smith, plaintiffs assert that each
breached their duties of loyalty, usurped corporate opportunities and committed
gross mismanagement by wrongfully using Millennia and DCT as instruments for
their own and HCC's pecuniary gain to the detriment of Millennia, DCT and their
shareholders. If any damages are ultimately awarded to the plaintiffs, those
damages will be on behalf of, and for the benefit of, the Company and all of its
shareholders. If they are successful, the plaintiffs may recover certain
attorney's fees and costs. This case is entitled Richard Abrons et al v. Kevin
B. Halter et al, Cause No. 96-02169-G, in the 134th Judicial District, Dallas
County, Texas. Even though the Company is a nominal defendant in the lawsuit,
the Plaintiffs have not sought to recover any damages against the Company. In
this type of lawsuit, the Company is joined as a procedural matter to make it a
party to the lawsuit.
All of the defendants have answered and denied the allegations contained in the
plaintiffs' Petition. A certain amount of discovery has been conducted by both
plaintiffs and defendants. All of the defendants deny all of the material
allegations and claims in the Petition, dispute the plaintiffs' contention that
it is a proper shareholder derivative action, deny that the plaintiffs have the
right to pursue this lawsuit on behalf of the Company and Millennia and are
vigorously defending the lawsuit. In addition, the defendants have filed
counterclaims against the plaintiffs and third party actions against Blake
Beckham, Attorney at Law, Beckham & Thomas, L.L.P., Sanford Whitman, the former
CFO of the Company and Jack D. Brown Jr., the former President of the Company,
seeking damages in excess of $50 million. In its counterclaim, the Company has
asserted that the filing of this lawsuit and the temporary restraining order the
plaintiffs caused to be issued in the case resulted in damages to the Company.
However, the Company does not believe that the lawsuit will have any further
material impact on the operations or financial condition of the Company.
Discovery is continuing and the matter has not been set for trial.
In February 1996, Convention Tapes International, Inc., a Florida corporation,
filed a civil action in the Circuit Court of the 11th Judicial Circuit for Dade
County, Florida, against Tapes Unlimited, Inc. and MagneTech Corporation for
damages "in excess of $50,000" allegedly resulting from breach of contract and
warranty, and fraudulent inducement and/or negligent misrepresentation on the
part of Tapes Unlimited. MagneTech Corporation is the previous name of the
Company, and Tapes Unlimited was an Orlando, Florida subsidiary of the Company
from March 1994 until Tapes Unlimited was dissolved in October 1995. Tapes
Unlimited ceased operations in June 1995. MagneTech Corporation is a named
defendant against whom plaintiff asserts vicarious or successor liability for
its alleged damages, claiming that Tapes Unlimited was the "alter ego" or "mere
instrumentality" of MagneTech. Upon motion of the defendants, in July 1996 the
civil action was transferred to the Circuit Court in Orange County, Florida,
Case No. CI96-5851.
As best the Company has been able to determine, in February 1995 Tapes Unlimited
duplicated certain videotapes for plaintiff from videotape masters provided by
plaintiff. Plaintiff alleges that the duplicates delivered by Tapes Unlimited
contained, in part, extraneous and pornographic material which caused plaintiff
to lose the business of a certain account, as well as the prospective business
of other, unspecified persons. The plaintiff has since ceased doing business.
10
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 6 - Litigation - continued
The Company currently has pending a motion to dismiss the matter and, therefore,
has not filed a substantive response to plaintiff's complaint. Minimal discovery
and some settlement discussions occurred in summer of 1996. Until the court
rules on the Company's motion to dismiss, it is uncertain whether the Company
must even defend the action. Even assuming that the motion to dismiss is denied,
the validity or depth of the claim is unknown to the Company. Similarly, the
probability of judgment, if any, and the potential range of monetary award
thereon, cannot be evaluated until substantive, formal discovery is undertaken.
Meanwhile, the Company intends to vigorously defend this matter, procedurally
and substantively.
The Company does not believe that it is currently involved in any pending
actions that will have a material adverse effect on its business, financial
condition and results of operations.
(Remainder of this page left blank intentionally)
11
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(1) Caution Regarding Forward-Looking Information
This quarterly report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
(2) Results of Operations
Overview
Digital Communications Technology Corporation (DCT or Company) continues to be
impacted by industry-wide trends towards slower retail sell-through of products
produced for the Company's customers and, accordingly, experiences significantly
reduced sales volume. Further, the diminished sales volume has negatively
impacted gross product margins as the Company's fixed costs compose a higher
percentage of each customer's order. The Company continues to experience
elevated general and administrative costs due to general overhead matters and
legal and professional costs related to the stockholder derivative litigation.
This litigation was scheduled for arbitration and mediation during the fourth
calendar quarter of 1997.
Results of operations
The Company experienced a decline in first quarter sales volume from
approximately $7.0 million for the three months ended September 30, 1996 to
approximately $2.2 million for the three months ended September 30, 1997.
Several factors impacted this decline in sales including, but not limited to,
management's evaluation of the Company's customer base and elimination of
inefficient and unprofitable accounts and the overall industry decline in
product sales.
The industry wide decline continues to be a result of a continuing retail
backlog caused by the closure of many stores in several large retail chains.
Product from these chain stores went back into the market, providing other
chains with the opportunity to buy distressed merchandise at significantly
reduced cost, and thus further slowing sales. At the same time, other chains
achieved sharp, margin-driven reductions in inventory levels by reducing in
store quantities and by returning significant amounts of unsold product to their
vendors, which are the Company's customers. In addition, releases of theatrical
product into video outlets lacked any real hits to draw people into rental and
sell-through activities. The industry consensus is that the overall industry
sales activity during Calendar 1997 is significantly slower than expected.
12
Due to the Company's fixed costs, cost of sales of approximately $1.99 million
compose approximately 90.4% of sales as opposed to approximately $5.57 million
or 79.3% of sales for the periods ended September 30, 1997 and 1996,
respectively. Management continues to evaluate its fixed and variable costs in
relation to sales activity to strive towards optimum efficiency and profitable
operations.
Selling expenses decreased by approximately $189,000 to approximately $117,000
as compared to approximately $306,000 for the three months ended September 30,
1997 and 1996, respectively. Management has reduced these costs in an effort to
better target quality customers that will best utilize the Compan's facility
and operational methods.
General and administrative expenses continue to be significantly affected by
general corporate overhead and legal and professional fees. The Company incurred
aggregate costs of approximately $938,000 during the first three months of
Fiscal 1998 as compared to approximately $624,000 during the first three months
of Fiscal 1997. A significant component of this increase was the September 1997
closing and relocation of the Ft. Lauderdale facility to Indianapolis.
Management is of the opinion that the closing of the Ft. Lauderdale facility and
the sale of the assets of its satellite uplink operation will significantly
contribute to future cost savings in these categories.
(3) Liquidity and capital resources
During the first three months of Fiscal 1998, the Company experienced net cash
provided by operations of approximately $529,000 as compared to using net cash
in operations of approximately $(224,000) during the same period of the
preceding year. Included in this net cash flow into the Company was the
collection, and affiliated reduction, of accounts receivable of approximately
$800,000 and the reduction of inventories of approximately $383,000. The funds
provided by these inflows were utilized to reduce accounts payable by
approximately $309,000.
Further liquidity was provided by approximately $168,000 in proceeds from the
sale of the satellite uplink equipment to an unrelated third party. This cash
inflow was offset by purchases of video duplication equipment and facilities in
the Indianapolis facility of approximately $193,000.
The Company also utilized cash during the first quarter of Fiscal 1998 to reduce
a book cash overdraft of approximately $175,000 and to lower the outstanding
balance on the Company's revolving line of credit of approximately $318,000.
Overall, the Company's available cash on hand decreased by approximately
$188,000 from June 30, 1997 to September 30, 1997 with the net change relating
to the overall increase in property and equipment at the Indianapolis facility.
The net change in cash provided by operations and the net cash used in debt
reductions basically offset.
The Company relocated and expanded the entire Indianapolis facility into a new
172,000 square foot building during Fiscal 1997. The Indianapolis plant opened
in June 1997 with an increased operating capacity of approximately 20%. The new
facility layout is designed to optimize process flow, to reduce product handling
and to minimize the total cycle time of productions from order entry to
delivery. As mentioned above, the Company added approximately $193,000 in
property and equipment during the first quarter of Fiscal 1998. Due to the
capital intensive and high technology nature of the Company's business, certain
levels of capital acquisitions for new duplication and production equipment
and/or upgrades of existing equipment will be required to keep the Company
competitive in the marketplace. Any such expenditures, if necessary, would be
financed through operations and separate financing/leasing arrangements. There
can be no assurances, however, that the Company will actually incur these
budgeted expenditures.
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Part II - Other Information
Item 1 - Legal Proceedings
See the Notes to Consolidated Financial Statements
Item 2 - Changes in Securities
None
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
September 25, 1997 Announcement of closing all operations in Ft. Lauderdale,
Florida including videotape duplication and mobile satellite uplink
service operations.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
November 13 , 1997 /s/ Kevin B. Halter
------ -------------------------------------
Kevin B. Halter
Chairman and Chief Accounting Officer
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